Days after RBI chief Rajan steps down, India eases foreign investment rules

By Manoj Kumar and Rajesh Kumar Singh

NEW DELHI (Reuters) - India announced on Monday sweeping reforms to rules on foreign direct investment, clearing the way for Apple to open stores in the country and announcing easier terms for investors in sectors ranging from civil aviation to pharmaceuticals.

The move comes two days after central bank governor Raghuram Rajan, a darling of financial markets but under pressure from political opponents at home, announced he would not seek another term, a surprise move that raised concerns about whether reforms he set in motion would stall.

"These changes are fairly significant, particularly if you look at them in the context of what happened over the weekend with Governor Rajan's decision to step down," said Shilan Shah, India economist at Capital Economics in Singapore.

"It might be the government's way to illustrate its commitment to reforms and mitigate any investor fallout."

Prime Minister Narendra Modi hailed the changes to foreign direct investment (FDI) rules, tweeting they would make India "the most open economy in the world for FDI" and provide a "major impetus to employment and job creation".

Modi, 65, has pitched to global business to come and "Make in India" since winning power two years ago. His government has touted a 29 percent rise in FDI to $40 billion in the fiscal year to March as proof the policies are gaining traction.

Yet, with India ranking 130th in the World Bank's latest Ease of Doing Business index, multinationals remain cautious amid lingering concerns about bureaucratic red tape and unpredictable tax officials.

The last time Modi loosened FDI rules was after his nationalist party suffered a heavy defeat in a state election last autumn.

Some companies welcomed the news, but others and industry analysts said changes in several industries appeared limited and the headline-grabbing announcement was more about seeking to wrest back control of the economic narrative.

For example, while the new rules allow 100 percent FDI in civil aviation, investment by foreign airlines in domestic carriers remains capped at 49 percent.

Another new rule allows foreign companies to invest up to 74 percent in 'brownfield', or existing, pharmaceuticals projects without government approval. But previous rules allowed 100 percent foreign ownership if government approval was obtained, and analysts doubted the change would have a big impact.

BENEFICIARIES

The new rules, however, do offer relief for single-brand retailers such as Apple and furniture giant IKEA that are finding it tough to meet India's requirement for them to sell at least 30 percent locally sourced goods.

CEO Tim Cook visited India last month on a mission to expand Apple's presence in the world's fastest-growing smartphone market, at a time when sales in the United States and China have slowed.

Under the relaxed norms, Apple would have three years to meet the sourcing rules with an extension of another five years if its products are judged "state-of-art" and "cutting edge".

The new regime also seeks to attract defence contractors hitherto reluctant to transfer technology to India. They would be able to own local operations outright, with government approval, up from a cap of 49 percent previously - although again some industry sources said this did not mark a big change.

Saab, the Swedish defence and aerospace company that recently re-pitched its Gripen fighter jet to the Indian Air Force, welcomed the announcement.

"We think this is a very good move and this decision by the government only encourages us to start our business in India," said Robert Hewson, Saab's Asia-Pacific head of communications.

(Additional reporting by Aditi Shah, Rupam Jain; Writing by Douglas Busvine and Rajesh Kumar Singh; Editing by Muralikumar Anantharaman and Mark Potter)